Different economies need different types of structural reform, IMF paper finds

The kind of structural reform a country should prioritise depends on its level of economic development, according to a paper published today (November 9) by the International Monetary Fund.

The policy paper is an attempt to give the fund more of a "strategic and analytically sound" approach to structural reforms and "effectively support the range of macro-structural needs" across all IMF member countries, the authors say.

The paper analyses the impact on total factor productivity (TFP) of a number of structural reforms in 108 countries over the years 1970–2011, comprising a mix of advanced market (AM), emerging market (EM) and low-income developing countries (LIDCs). The authors divide reforms into several broad classes, ultimately finding a reform's TFP impact depends on a country's level of development.

LIDCs should probably favour reforms of agriculture, they say, followed by changes to the banking system, infrastructure and fiscal systems. EMs should prioritise changes to business regulation, the labour market, infrastructure and the fiscal system. AMs should usually prioritise reform of the fiscal system, infrastructure, the labour market and the regulation of technology and innovation.

The pacing of reforms can influence their effectiveness, along with whether specific reforms are introduced on their own or as part of a wider "wave" of measures, the authors say.

Sometimes a "more gradual implementation may be likely to yield benefits", they say, for example when a country undergoing a natural resource boom starts to invest in infrastructure. At other times, a "big bang" approach can achieve superior results, the authors say, giving as an example emerging market reforms to agriculture.

The authors say their results should be treated "with caution". Nonetheless, they suggest their paper might form the basis for prioritising types of reform based on an economy's development. The IMF should seek to carry out further analytical work looking at the effectiveness of specific structural reforms, they say. Research should also investigate the impact of some kinds of structural reform on macroeconomic resilience, financial stability and inclusive growth.